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Saturday, 30 November 2013

What is Servitization?

I've had a couple of occasions in the last
week where I've used the word "servitization" - either in a
presentation or an article and someone has responded by saying, "so what
is servitization". Given the frequency of the question I thought it might
be worth writing a short blog to explain what servitization is and where the
idea came from.

In essence servitization is a
transformation journey - it involves firms (often manufacturing firms)
developing the capabilities they need to provide services and solutions that
supplement their traditional product offerings. More formally, my colleagues
and I at Cranfield University defined servitization as "the innovation of
organisation’s capabilities and processes to better create mutual value through
a shift from selling product to selling Product-Service Systems". Two
other definitions accompany this: (i) the idea of a product-service system -
"an integrated product and service offering that delivers value in
use" and (ii) a "servitized organisation which designs, builds and
delivers an integrated product and service offering that delivers value in
use".

It is worth unpacking these definitions a
little, but before I do, let me give a couple of practical examples of
servitization. The first, and classic, example is Rolls-Royce selling
"power-by-the-hour". Instead of selling aero engines, Rolls-Royce now
contracts with many of its customers for "power-by-the-hour". In
essence the customer buys the power the aero engine delivers and Rolls-Royce
provides all of the support (including maintenance) to ensure that aero engines
can continue to deliver power. This shift in business model is important
because it means the interests of clients and providers are much more closely
aligned. In the olden days Rolls-Royce used to make money on time and materials
- basically repairing engines. Put crudely the worse the engines were, the more
maintenance they required, so the more money Rolls-Royce would make. Of course
customers don't want unreliable engines that are always in the repair shop.
They want reliable products that - in Rolls-Royce's case - allow planes to fly
safely.

This same trend - selling solutions rather
than products - can be seen in lots of industries. In healthcare, for example,
many pharmaceutical firms are under significant pressure. The cost of
developing drugs is increasing, many of the traditional drugs are coming off
patent and so the generic manufacturers can move into the market. As a
consequence pharmaceutical firms are rethinking their business models -
defining themselves as healthcare solutions providers. Think like a patient -
most of us don't want the products that pharmaceutical firms provide. We'd
prefer not to be ill in the first place. So if someone can provide healthcare
solutions, which reduce the likelihood of illness, the interests of providers and
customers are again much more closely aligned.

So let us return to the definitions. To
make this transformation - to sell services and solutions - requires
significant change inside many traditional manufacturers. They have to
recognise that the product is a platform to deliver a service. They have to
build solutions that deliver the outcomes their customers want and value. In
essence these solutions are often capture in product-service systems,
combinations of products and services. Customers only realise value from these
when they actually receive the service - hence the concept of value in use.

Servitization as a word has been around
since the late 1980s. The most frequently source article is cited as
Vandermerwe, S., & Rada, J (1988) "Servitization of Business: Adding
Value by Adding Services", European Management Journal, 6(4), 314–324. An
article that appeared, but has only relatively recently been getting more
attention in the broader academic literature and business press. A recent
high-profile example, is UK Government's Foresight Report on the Future of
Manufacturing - which identifies servitization as a core element in its vision
for the future of manufacturing.

If you'd like to know more about servitization and my latest thinking on the topic why not join me for the Cambridge Service Design Programme: Making the Shift to Services - scheduled for 6-7th May. It would be a pleasure to see you there.

Hi Nazzim - thanks for the question. It would depend on whether you were providing poultry products to supermarkets (or other stores) or providing goods to support farmers rearing poultry products. In the case of the latter you might imagine a model where the provider offers a guaranteed availability to the retailer - the provider monitors stock levels in store and ensures the retailer never runs out of product to sell. In the case of those providing equipment to the farmer you could focus on machine/equipment availability, provide infrastructure to allow the farmer to monitor the chickens - egg laying patterns, weight gain, etc. Ultimately its about understanding the outcome your customer or your customer's customer is looking for and working out how you deliver this.

Indeed, thank you prof. Neely for your clear definition and the related examples. I can add an example related to my company, D'Ieteren: we are the importers of all cars from the VW Group in Belgium. Besides just selling cars, we offer to our customers a "We Care" contract, which for a modest amount/month guarantees all maintenance and repair operations, so that the customer always has a "tool" to be mobile that works. Regards. Eric Van der Stichelen HRD D'Ieteren Auto

very clear explanation Prof. Neely, thank you! Do you see that this concept can be applied to the built environment thinking of the building as "product". There are many existing services in the operation of the building, however the "manufacturer" (design and construction firms) do not take part in those services.

Hi Francisco - absolutely, in fact there are efforts by some building firms to servitize. Think of BIM (building information management) - efforts to create digital footprints of buildings that can be used to monitor the state of buildings across their lifetime. Some construction companies have moved into building and the leasing the buildings, capturing an ongoing revenue stream. I believe that servitization is a strategy that is open to any organisation providing complex, long-life span assets.

Hi Andy And Fransico - re buildings - A relevant example in AEC is public-private partnership - The classic one is where the contractor will operate the road for many years and get the toll booth money. Now we see similar arrangements for buildings. E.g Skanska are responsible for operating and maintaining the New Karolinska Hospital (their largest project ever) for more than 25 years.Another example related to existing building portfolios are Energy performance contracting. A MEP contractor will together with the owner identify possible improvements, set goals and guarantee results. If performance goals are not reached the contractor will cover the difference. We have seen similar situations in insurance where the insurer will suggest improvements and lower the insurance fee. Both parties wins as the risk and damages are lowered.I totally agree that the use of BIM and related for both new building projects and existing assets will open up for further evolvement of business model innovation related to servitization

About Me

Pro-Vice-Chancellor: Enterprise and Business Relations and former Head of the Institute for Manufacturing at Cambridge University. Founding Director of the Cambridge Service Alliance. Specialising in manufacturing and services, especially strategy and performance, business models and analytics.